If your business sells physical products— especially within eCommerce— then it’s important to understand the concept of landed cost. Any and all costs and fees that go into your product before you sell it have to be considered if you want to make a profit on your inventory. This is where each product’s landed cost comes into play.
Knowing each product’s landed cost is key to ensuring that your company makes a profit on that product and maintains healthy cash flow. But calculating landed cost yourself can be tricky and leave a lot of room for error. Thankfully, like with the rest of your finances, QuickBooks can make calculating landed costs fast and easy.
Before we get into that though, let’s take a closer look at what landed cost is and how to accurately calculate it.
What is Landed Cost?
Landed cost, also known as landed price or total landed cost, is the total amount of money it costs for a vendor to fulfill customer orders.
The total landed cost doesn’t just include the cost of goods from the manufacturer and shipping, but instead a combination of all fees and expenses required to get your inventory to you and ready for your business to sell.
A landed cost calculation will be the sum of any and all logistical costs and expenses that go into your company’s products. As you can imagine, there are a lot of factors that can go into the net landed cost of each product. Among them include:
- The actual cost of the product
- Shipping fees
- Insurance
- Customs fees
- Any included tax
- Overhead
- Other associated fees or surcharges
The list above barely scratches the surface of what costs can be included in calculating total landed cost, so let’s go into some of these bullet points in a little more detail.
Product Cost
Product cost per unit can run the gamut from inexpensive to costly, so this should be the first cost you take into consideration when calculating landed cost.
What was the purchase price or vendor bill your company had to pay to the manufacturer? Do you need to be mindful of another currency’s exchange rate? Are you paying for the product itself, or its components?
Material Cost and Cost of Labor
A business’s product isn’t always an item one can physically possess. These costs include the type of work done, materials utilized, how much time went into the work, and the value of the finished product. A few examples of this can include:
- A freelance graphic designer creating a package design for your product
- A construction worker building a structure and including material costs and time spent on their invoice
- A new independent contractor including the cost of programs or subscriptions they required before starting work on their projects
Shipping and Freight Cost
Your product’s shipping cost, including packing, handling, and transportation, is another key part of determining landed cost.
Questions to ask yourself or consider when calculating your products’ shipping costs include:
- How does your shipment get to you?
- How much does your freight forwarder charge for service?
- Do they require any extra fees or shipment costs?
- Does transportation of goods require ocean freight or air freight?
- Are your shipments insured against potential damage, shipping delays, or being lost in transit?
Shipment time can also be a major factor in your shipping costs. Less urgent shipping speeds, for example, 5-14 business days, can be much more cost-efficient than paying for overnight shipping which can be expensive— especially if your products are already costly or incur additional fees, such as customs fees, while in transit. However, if you need your shipment quickly, then more expensive shipping options will be necessary to ensure your inventory needs are met.
Insurance
Shipping insurance is optional, but it’s often used with expensive shipments to ensure that your product arrives, and arrives safely. Of course, this insurance is not free, so you will need to account for this expense if applicable in your total landed cost. This can be especially useful for international shipping, or in the shipment of fragile or sensitive items.
Overhead
Overhead is any and all costs required to run a business— so you’ll want to consider how it can add to total landed cost too. This can include but is not limited to:
- Advertising
- Rent & Utilities
- Taxes
- Repairs
- Supplies
As you can imagine, these small costs can add up quickly. This is where an accurate landed cost estimate comes in to keep things operating smoothly.
Why It’s Important to Accurately Calculate Landed Cost
Landed cost takes all fees, taxes, and other costs into consideration so that your business’s bottom line is well taken care of.
If your business provides any physical products, then identifying accurate landing costs is vital for creating your prices and ensuring a healthy profit margin for your company.
As you can tell, there can be a lot of numbers to consider here, so you absolutely must have your finances organized in order to have an accurate total landed cost. If your finances are disorganized, it can be easy to botch these calculations, which can have a negative effect on your bottom line.
However, once you figure out your landed costs for each item in your inventory, determining their prices is a much simpler process. But before we get too ahead of ourselves, let’s go through how to calculate landed cost manually.
How to Calculate Landed Cost
Your total landed cost is the sum you get from adding together all costs related to your product.
Total landed cost = Product or Materials Cost + Shipping + Insurance + Overhead + Customs
The landed cost formula is simple in essence— finding all the necessary components is where it gets tricky. Let’s create a basic example below and go through this step by step.
When all the required numbers are in place, you can calculate the total landed cost.
So, if your product costs $50 from the manufacturer, that’s the first part of the equation. And if they’re shipping 1000 units to you for $2000, or $2 a unit, consider that as well. Add insurance, $5 per unit, and overhead, $2 per unit. Add in an additional fee for customs, 2% per unit. Your equation should look something like this:
Total landed cost ($60) = 50 + 2 + 5 + 2 + 1
The number you get from calculating your estimated landed cost is how much you would need to charge to break even on each sale.
To come up with your selling price, you will need to add a markup to your product in order to make a profit. Consider how much markup you will add to your landed cost to create your selling price.
Your circumstances may vary depending on what associated costs are included in bringing your products to your customers, but as long as you keep all costs in mind, big or small, you should be able to accurately calculate your total landed cost per product.
That being said, calculating it manually can be time-consuming and potentially vulnerable to human error. To prevent this, we recommend using QuickBooks to calculate landed costs for your company’s products.
Quickbooks Can Make Calculating Landed Cost Fast and Easy
You probably already know how QuickBooks can make keeping track of your business’s finances much easier, but did you know that it can calculate landed costs for you as well? To do this, you’ll need the QuickBooks Enterprise program, and follow their instructions for how to set up landed cost in QuickBooks Enterprise Services.
In this program, you can easily keep tabs on your entire inventory, keep all the associated costs all in one place, split costs by quantity, percentage, or do it manually, and update your selling price based on landing cost, all in one place.
When you purchase your preferred QuickBooks software from MISSION, we can help you install it and assist you in getting the most out of your software. We can also train your company in how to use it, and provide valuable insights when working with a skilled accountant.
Bernard Roesch, MISSION Accounting’s founder, is a Harvard MBA and a QuickBooks ProAdvisor. He has over 25 years of experience in advising his clients and helping them make smart and profitable business decisions. He and his team of QuickBooks experts can also help you choose the right QuickBooks version and help your business unleash the full power of QuickBooks to help your business and its finances thrive.
Contact us at Mission Accounting today to schedule a complimentary consultation for your QuickBooks software needs. We’re here to help you find solutions to all your business’s financial needs and make keeping track of your finances infinitely easier.
